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President Takes Radical Steps to Nationalize Hydrocarbons - International Law Office

International Law Office

Energy & Natural Resources - Bolivia

President Takes Radical Steps to Nationalize Hydrocarbons

June 05 2006

Complete State Control
Tax Increase
Nationalization of Shares
Appointment of Directors
Comment


In May 2006 President Evo Morales Ayma passed Supreme Decree 28701 on the nationalization of hydrocarbons.

Complete State Control

Although the Hydrocarbons Law (3058/2005), enacted, in May 2005 established that the hydrocarbons and petroleum industries would return to state control (for further details please see "Application of the Transportation Regulation in the New Hydrocarbons Law"), the private sector was still hopeful that the state would assume only a certain degree of control over these industries.

Instead, the decree marks a radical departure from the former situation. It awards the state complete control over these resources, further establishing that private companies have 180 days to ensure that current contracts conform to the requirements imposed by the decree or alternatively cease operations in Bolivia.

Tax Increase

The decree establishes, as a temporary measure, a requirement that Petrobras, Andina (a subsidiary of Repsol) and Total, which currently operate the mega-gas fields of San Alberto and San Antonio, now pay tax at a rate of 82%, rather than the 50% tax established by Law 3058/2005. However, under the Constitution and the Tax Code, tax burdens may be created or modified only by law (ie, not by decree). Consequently, the government has passed an unconstitutional decree and it would be no surprise if these companies filed suit against it.

Nationalization of Shares

The decree also establishes that the state will re-nationalize the necessary shares of the former state companies that were privatized in 1996 and 1997 by foreign investors, in order to enable state-owned Yacimientos Petroliferos Fiscales Bolivianos (YPFB) to control 50% plus one of the shares of these companies. The Morales government is thus regaining control through confiscation, as there has been neither consensus nor negotiation with the foreign stockholders. Furthermore, Morales recently indicated that these companies will not be indemnified for the lost shares as they have been profiting from Bolivian natural resources for a long time and therefore, according to Morales, have already received indemnification. However, Morales has since indicated that the Bolivian government will pay the indemnification if it corresponds to a technical, legal and economic audit.

Appointment of Directors

Finally, the decree grants YPFB the power - which it has already exercised - to appoint directors of these companies. This is also contrary to current legislation, as the Commercial Code establishes that in order to elect directors the appointee must control shares, and this provision has not yet been endorsed in favour of the state.

Comment

As well as causing major controversy regarding the method of nationalization chosen by the government, the decree is flawed from every angle.

The Spanish and Brazilian governments have stated that they plan to negotiate with the Bolivian government in order to attempt to mitigate the impact on investment in the country by Repsol and Petrobras. The results of these negotations are eagerly awaited.

It is also likely that the pending arbitration proceedings brought by the companies against the state will be reactivated, or new proceedings filed. Such proceedings are likely to lead to much-reduced incentives for foreign investment in Bolivia, and the possibility that the state may have to reimburse these companies large sums.


For further information on this topic please contact Rodrigo A Henriquez Essmann at Indacochea & Asociados, Abogados by telephone (+591 3 535 356) or by fax (+591 3 581 200) or by email (rhenriquez@indacochea.com.bo).



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